Chronology of a Collapse

October 16

November 1997

Service indicates that it is considering lowering its credit rating on Enron

Enron buys out a partner's stake in a company called JEDI and sells the

debt securities.

stake to a firm it creates, called Chewco, to be run by an Enron officer.

Stock Close: $33.84

Enron reports a third-quarter loss of $618 million. Moody's investors

Thus begins a complex series of transactions that enable Enron to hide

debts.

October 22
Enron discloses that the Securities Exchange Commission has opened

February 20, 2001

an inquiry.

A FORTUNE story calls Enron a "largely impenetrable" company that is

piling on debt while keeping Wall Street in the dark.

October 24

Stock Close: $75.09

Chief financial officer Andrew Fastow, who ran some of Enron's stealth
partnerships, is replaced.

April 17
Enron chairman Ken Lay meets with Vice President Dick Cheney and

October 26

other energy-policy officials; it's one of six such visits.

The Wall Street Journal reports the existence of the Chewco

partnerships run by an Enron manager. Ken Lay calls Fed Chairman Alan

August 14

Greenspan to alert him of the company's problems.

CEO Jeffrey Skilling resigns, becoming the sixth senior executive to

Stock Close: $15.40

leave in a year. Lay says in a conference call with stock analysts, "I never
felt better about the company." He deflects analysts' pleas for more

October 28

disclosure. They lower their ratings on Enron stock, which drops in after-

Lay calls Treasury Secretary Paul O'Neill. In October and November,

hours trading to a 52-week low.

Enron's president phones an O'Neill deputy at least six times, seeking

Stock Close: $39.55

help.

October 12

October 29

Arthur Andersen legal counsel instructs workers who audit Enron's

Lay calls Commerce Secretary Donald Evans, suggesting he help Enron.

books to destroy all but the most basic documents.

November 8
Enron admits accounting errors, infalting income by $586 million since
1997.
November 9
Lay again talks to Treasury's O'Neill.

Street to its very core. To this day, many wonder how a company
so big and so powerful disappeared almost overnight. How did it
manage to fool the regulators and the Wall Street community for so
long, with fake off-the-books corporations? What is the overall
lasting impact that Enron has had on the investment community
and the country in general?
Tutorial: Introduction To Accounting

November 29
The SEC expands its investigation to include auditor Arthur Andersen.
December 2
Enron files for bankruptcy.
Stock Close: 26 cents
December 12
Andersen CEO Joseph Berardino testifies his firm discovered "possible
illegal acts" committed by Enron.
January 9, 2002
The Justice Department launches a criminal investigation.
January 10
Attorney General John Ashcroft rescues himself from the investigation
because of contributions he received from Enron. Andersen acknowledges
destroying Enron files.

Enron is a company that reached dramatic heights, only to face a

dizzying collapse. The story ends with the bankruptcy of one of
America's largest corporations. Enron's collapse affected the lives
of thousands of employees, many pension funds and shook Wall

Collapse of a Wall Street Darling

By the fall of 2000, Enron was starting to crumble under its own
weight. CEO Jeffrey Skilling had a way of hiding the financial
losses of the trading business and other operations of the
company; it was called mark-to-market accounting. This is used in
the trading of securities, when you determine what the actual value
of the security is at the moment. This can work well for securities,
but it can be disastrous for other businesses.
In Enron's case, the company would build an asset, such as a
power plant, and immediately claim the projected profit on its
books, even though it hadn't made one dime from it. If
the revenue from the power plant was less than the projected
amount, instead of taking the loss, the company would then
transfer these assets to an off-the-books corporation, where the
loss would go unreported. This type of accounting created the
attitude that the company did not need profits, and that, by using
the mark-to-market method, Enron could basically write off any loss
without hurting the company's bottom line. (Read more about the
disastrous implications of mark-to-market accounting in Mark-ToMarket Mayhem.)
Part of the reason the company was able to pull off its shady
business for so long, is that Skilling also competed with the top

Wall Street firms for the best business school graduates, and would
shower them with luxuries and corporate benefits. One of Skilling's
top recruits was Andrew Fastow, who joined the company in 1990.
Fastow was the CFO of Enron until the SEC started investigating
his role in the scandal. (Read more in Are Your Stocks Doomed?)
Fraud: What Was the Scheme?
The mark-to-market practice led to schemes that were designed to
hide the losses and make the company appear to be more
profitable than it really was. In order to cope with the mounting
losses, Andrew Fastow, a rising star who was promoted to CFO in
1998, came up with a devious plan to make the company appear to
be in great shape, despite the fact that many of its subsidiaries
were losing money. That scheme was achieved through the use
of special purpose entities (SPE). An SPE could be used to hide
any assets that were losing money or business ventures that had
gone under; this would keep the failed assets off of the company's
books. In return, the company would issue to the investors of the
SPE, shares of Enron's common stock, to compensate them for the
losses. This game couldn't go on forever, however, and by April
2001, many analysts started to question the transparency of
Enron's earnings. (For more, see The Biggest Stock Scams Of All
Time.)
The Shock Felt Around Wall Street
By the summer of 2001, Enron was in a free fall. CEO Ken Lay had
retired in February, turning over the position to Skilling, and that
August, Jeff Skilling resigned as CEO for "personal reasons." By
Oct.16, the company reported its first quarterly loss and closed its
"Raptor" SPE, so that it would not have to distribute 58 million
shares of stock, which would further reduce earnings. This action
caught the attention of the SEC. (Find out how this regulatory body

protects the rights of investors. Read Policing The Securities

Market: An Overview Of The SEC.)
A few days later, Enron changed pension plan administrators,
basically forbidding employees from selling their shares, for at least
30 days. Shortly after, the SEC announced it was investigating
Enron and the SPEs created by Fastow. Fastow was fired from the
company that day. In addition, the company restated earnings
going back to 1997. Enron had losses of $591 million and had
$628 million in debt, by the end of 2000. The final blow was dealt
when Dynegy (NYSE:DYN), a company that had previously
announced would merge with the Enron, backed out of its offer on
Nov. 28. By Dec. 2, 2001, Enron had filed for bankruptcy. (Learn
more about finding fraud in Playing The Sleuth In A Scandal
Stock.)
Lasting Effects
Enron shows us what a company and its leadership are capable of,
when they are obsessed with making profits at any cost. One of
Enron's lasting effects was the creation of the Sarbanes-Oxley Act
of 2002, which tightened disclosure and increased the penalties for
financial manipulation. Second, the Financial Accounting
Standards Board (FASB) substantially raised its levels of ethical
conduct. Third, boards of directors became more independent,
monitoring the audit companies and quickly replacing bad
managers. While these effects are reactive, they are important to
spot and close the loopholes that companies have used, as a way
to avoid accountability.
The Bottom Line
The collapse of Enron was an unfortunate incident, and it is
important to know how and why it happened, so we can
understand how to avoid these situations in the future. Looking

back, the company had incurred tremendous financial losses as a

result of arrogance, greed and foolishness from the top
management, all the way down. Many of the company's losses
started the collapse that could have been avoided, if someone had
had the nerve and the foresight to put a stop to it. Enron will remain
in our minds for years to come, as a classic example of greed gone
wrong, and of the action that was taken to help prevent it from

happening again. (For further reading, see Business Owners:

Avoid Enron-esque Retirement Plans.)